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Five Lessons from the AIG Bonus Blowup

Last week, outlets reported that “the clock was ticking” for “embattled” Treasury Secretary Tim Geithner, with a few members of Congress openly calling for his ousting. His boss, President Barack Obama, was criticized for not engaging in the congressional furor over the $165 million in bonuses paid out to top executives at AIG  the insurance giant that has received more than $180 billion in federal money. This week Obama remains relatively untouched in the polls, and Geithner is basking in his best week of media coverage yet. How did their fortunes shift so suddenly? To some degree, they were helped by the fact that New York State Attorney General Andrew Cuomo announced Monday night that he has already managed to get AIG employees to give back $50 million of the bonuses. But much of the credit still has to go to the Obama Administration for its handling of the AIG fracas. With that in mind, here are five lessons of the latest Beltway blowup.

1. Stay one step ahead of the news

Geithner caused himself so much grief by not being on top of the bonuses, even though many on his staff and on Capitol Hill knew for months they were coming. Clearly, Geithner is a busy guy, what with managing a collapsing economy, trying to restart the credit system and dealing with China, Europe and other representatives of the global marketplace as the recession spreads. And he hasn’t exactly had an easy time hiring staff, with three top appointees withdrawing their names from consideration in the past month. “I knew that we had a big mess on the compensation side to deal with, but I did not have  I should have had, but I did not have  detailed knowledge of these particular legally contracted retention bonuses for [AIG] until I was briefed by my staff on March 10,” Geithner told a House Financial Services Committee hearing on the AIG bonuses Tuesday. “That’s my responsibility.”

2. Once Congress has worked itself into a snit, there’s no reasoning with them

The best recourse, which the Obama Administration successfully employed, is to treat the House and Senate like a 2-year-old having a temper tantrum. Utter a few reassuring words: “Today’s vote rightly reflects the outrage that so many feel over the lavish bonuses AIG provided its employees at the expense of taxpayers,” Obama said in a statement Thursday after the House passed a bill to tax back 90% of the bonuses  a bill he later effectively came out against. It may also be necessary to make sure they don’t hurt themselves, as Obama did by slowing any momentum on the Senate bonus bill when he expressed doubts about the approach on 60 Minutes Sunday night. “You certainly don’t want to use the tax code to punish people,” Obama said.

3. When they’ve exhausted themselves, speak slowly and calmly about the bigger picture

It’s key to remind folks, as New York Times columnist David Brooks put it, to focus their attention on the ravenous “tiger … lunging at your neck”  i.e., the tanking world economy  instead of the “dust bunnies under the bed,” the AIG bonuses. Geithner employed this tactic Tuesday: “AIG highlights very broad failures of our financial system,” Geithner told the House panel Tuesday. “Our regulatory system was not equipped to prevent the buildup of dangerous levels of risks. Compensation practice rewarded short-term profits over long-term financial stability, overwhelming the checks and balances in the system.”

4. Distract them with a big, shiny new toy

If Geithner had testified before the same committee last week  as AIG CEO Edward Liddy did  he likely would’ve been eviscerated. Many of the “questions” for Liddy from both sides of the aisle turned into frustrated rants about how Geithner was botching his job and why the Treasury only just found out about the bonus payments. This week, though, Geithner was saved, in part, by the introduction Monday of the long-awaited details of his plan to get credit flowing again. Unlike his first stab at a rollout, this scheme was well received by the stock market, sending the Dow Jones industrial average up nearly 500 points, the fourth best day of trading since 1933 . At least half the questions Tuesday were forward-looking, centered on the particulars of the public/private partnership plan to get toxic assets off the books of banks.

5. Turn the negative into a positive

Overall approval ratings show that Obama has not personally suffered in the AIG uproar, though Geithner, Congress and Wall Street most certainly have. On Tuesday Geithner tried to parlay his boss’s position of strength into a larger mandate to prevent another AIG Bonusgate from happening again. Suddenly, members found themselves contemplating giving more power to the guy whom many wanted fired last week. “It is clear that we’re going to need to ask, and we will ask, for broader authority to deal with future AIGs,” Geithner warned the committee. “Our responsibility is to recommend to Congress what’s necessary to help get the economy back on track. And if that requires more resources, it will be our obligation to come to you and make the case for that.”

These lessons will be particularly important as Obama this week tries to persuade skeptics in Congress to pass his $3.6 trillion budget and, as Geithner warned, the Administration is forced to go back to ask Congress for upwards of $750 billion to fund the bank-bailout plan. “We recognize it’s going to be extraordinarily difficult, particularly in the wake of not just the events of the last two weeks, but the last nine months, frankly,” Geithner conceded in the hearing.